What Is an Obligor?
An obligor, also referred to as a debtor, is an individual or entity legally required to provide a benefit or payment to another party. In finance, an obligor typically refers to a bond issuer mandated to make all principal repayments and interest payments on outstanding debt. The recipient of these payments is known as the obligee.
Key Takeaways
- An obligor is legally or contractually obliged to provide a benefit or payment to another.
- An obligee is the person or entity receiving the payments or owed the obligation.
- An affirmative covenant requires the obligor to perform specific actions, like hitting performance benchmarks.
- In family law, an obligor may be required to pay child support as mandated by court order.
Understanding Obligors
An obligor is someone legally bound to pay another. Common examples include debt holders. Beyond repaying principal and interest, corporate debt often comes with additional needs. For bondholders, these needs are called covenants, outlined when the bond issue is created between the obligor and obligee.
Obligor in Corporate Settings
Covenants in corporate settings can be affirmative or negative. An affirmative covenant mandates the obligor perform specific tasks, such as meeting performance benchmarks. A negative covenant restricts certain actions, like restructuring leadership. Due to these contractual obligations, obligors typically have minimal flexibility in deferring payments or circumventing covenants.
Any delay in payments may be seen as a default, with considerable long-term consequences for the business. Bond obligors, thus, approach their debt obligations seriously. However, defaults by overleveraged obligors do happen occasionally.
In cases where a covenant is breached, a bond might become invalid, requiring immediate repayment or converting to equity ownership.
Obligor in a Personal Setting
Obligors also exist in family law. For instance, a court order in a divorce settlement may require one parent to pay child support to the other. If a parent is ordered to pay $500 a month, they become an obligor. Changes in the obligor’s financial status can lead to court petitions to reduce payments. Nevertheless, even if an obligor loses their job, these payments usually persist and cannot be discharged like other civil judgments.
Falling behind on child support can lead to wage garnishment, driver’s license loss, and other issues. Therefore, it’s vital for obligors to fulfill or adjust obligations if financial conditions change.
Is the Borrower the Obligor?
In debt contexts, the borrower (debt holder) is the obligor, obligated to pay the lender or obligee. In scenarios like child support, the obligor may not have conventional debt but is still required to provide payments.
Who Is the Obligor in a Surety Bond?
In surety bonds, which are promises to fulfill responsibilities in default situations, three parties are involved: the principal (obligor), the surety (guarantees the bond), and the obligee (typically a government agency).
What Happens When the Obligor of Child Support Dies?
Upon the death of an obligor responsible for child support, their estate might still owe payments based on state laws.
The Bottom Line
Understanding the roles of obligor and obligee is key in clarifying financial responsibilities, whether due to debt or contractual obligations.
Related Terms: Debtor, Bondholder, Covenants, Surety Bonds.
References
- American Family Law Center. “Obligor”.
- Nelson Law Group, PC. “Obligor vs. Obligee—Which One Are You?”
- National Association of Surety Bond Producers. “What Are Surety Bonds”?
- U.S. Department of the Treasury. “FAQ for New Individual Securities Law”.
- Legal Information Institute, Cornell University. “Child Support”.
